In October, David Roodman hit a nerve when he drew attention to the fact that Kiva’s lenders were investing in loans already issued by microfinance institutions, instead of directly lending to specific borrowers, as many Kiva lenders believed. Kiva’s not alone; MicroPlace also hasan indirect funding model (as Roodman pointed out). And this isn’t necessarily a bad thing—provided institutions are transparent about it.

In fact, indirect lending is in many ways a smarter model. Microfinance institutions (MFIs) serve essential functions: they’re in the best position to know customers, determined the most favorable prospects, and allocate resources for the biggest impact.

Kiva works with microfinance institutions across the world, and the funds pass through Kiva to the MFIs. MicroPlace, which is owned by eBay and registered as a broker-dealer firm with the Securities and Exchange Commission (SEC), operates under a different model. Investors purchase securities, which in turn fund guarantees or loans for microfinance institutions. The MFIs benefit from having a local presence, and they are best equipped to handle regulatory hurdles. They can also offer assistance to borrowers in completing information and understanding the terms of the loans. Individual lenders like you and me are not in a particularly good position to assess who’s a truly worthy (or unworthy) borrower, and the indirect lending model eliminates obstacles that web-based peer-to-peer lending sites face.

While comparisons have to be made carefully, consider true peer to peer lending operations like Prosper and Lending Club. Their high default rates are worrying, and the SEC is taking a close look at their balance sheets. Prosper temporarily suspended new lending activity in October 2008, as did Lending Club in April 2007; even Zopa (with an intermediated funding model) completely exited the US market due to “extremely difficult consumer circumstances.” Economists who have examined data from Prosper found that lenders preferred borrowers whose physical appearance was rated above average. Moreover, black borrowers paid 139-146 basis points more than white borrowers with similar profiles. So much for making credit markets fairer. Maybe intermediaries aren’t such a bad idea.